When to Get Back in the Market

For millions of Americans, watching and waiting is the new day-trading-and the trillion-dollar question is when they’ll feel fully comfortable investing in stocks again. In the U.S. alone, investors still have nearly $900 billion parked on the sidelines, according to Thomson Reuters.

The tide finally began to shift this spring, when an upward bounce in the markets and upbeat forecasts from luminaries like Federal Reserve Chairman Ben Bernanke helped lure some investors out of hiding. Financial advisers say they’re seeing a surge of inquiries from clients about stocks. “It’s about 15 to 1 in terms of calls from people who want in versus out,” says Tom Hepner of Ruggie Wealth Management. And sentiment among fund managers recently shifted from “apocalyptically bearish to reluctantly bullish,” according to a survey by Banc of America Securities-Merrill Lynch.

The key word, though, is “reluctantly.” The recent rallies have eased some investors’ fears, but it will take a lot more prodding for others to get over the crash of 2008. Although the pros know that historically, stocks recover long before the rest of the economy, nobody wants to suffer more losses by getting in too early. Or, for that matter, too late: Some who missed out on this spring’s stock gains now fear that the market has no more gas in the tank. Misgivings like these explain why pros and amateurs alike obsess over their favorite economic indicators-from “TED spreads” (it’s a bond thing) to taxi-line wait times – trying to decide if the glimmers of improvement can translate into a lasting recovery.

With that in mind, we polled a slew of economists, managers and strategists to find out which signals will give them confidence that the worst is truly behind us. No single one of these indicators is a surefire green light. While any number of statistics-like weekly unemployment claims and surveys of sentiment among manufacturers-have helped to signal rebounds from the 10 recessions since World War II, few have hit the mark each time. TD Ameritrade Chief Investment Strategist Stephanie Giroux says that before she utters the words “a new bull market,” she needs to see “clear evidence on multiple fronts that the economy is starting to grow again.” For investors still smarting from last fall, waiting for multiple “go” signs has an appealing logic. Before they feel confident about the stock market’s risks, they want to feel like the other elements of their economic lives are secure.

HOPES FOR HOUSING

Since there was a housing bubble at the epicenter of this financial crisis, it’s natural to look to the real estate market for signs the worst is over. After all, if people are willing to buy homes, it suggests they feel pretty good about their jobs and future prospects – all positive signals for a sustainable stock run. But it’s not as easy as counting how many people are visiting the open house next door, or even counting home sales, where figures were inflated this spring by a record number of homes being sold in foreclosure.

So where are economists looking for a welcome mat? For starters, they’d like to see more stability in home sales and prices. Since there’s still a glut of homes sitting empty, experts suspect it will be some time before prices start rising meaningfully. To try to spot the home-price bottom, Giroux is keeping her eyes on the trends in existing home sales. Many homeowners are currently opting to stay put rather than join the fire sale of foreclosed homes, but once they feel comfortable enough putting their homes on the market, it’ll be a sign the housing situation is on the mend. It’ll be another good sign when housing starts and building permits increase after a long decline – that will suggest developers finally feel they can make money on new buildings again.

Despite a market full of bargains, Americans have had a hard time overcoming the psychological hurdle of buying a home amid uncertain financial times. But if they’re looking for an excuse to turn the corner, they might be encouraged by housing-affordability indexes like the one maintained by the National Association of Realtors. Those indexes compare home prices with local incomes and mortgage rates, and in many areas of the country, they show that buying now makes more economic sense than renting. Housing affordability typically improves like this about two quarters ahead of revivals in investment in real estate, according to Ed Yardeni, chief investment strategist at Yardeni Associates. Another encouraging sign: The Consumer Sentiment index, issued by Reuters and the University of Michigan, recently found that 70 percent of respondents thought it was a good time to buy a home, up from a low of 57 percent in 2006. “I think we are seeing a bottoming process,” says Stephen Kim, senior analyst at Alpine Global Real Estate fund.

What to watch: Housing starts and building permits. The more, the merrier.

Where to get it: The Census Bureau’s New Residential Construction index.